FROM THE OFFICE OF PUBLIC AFFAIRS

I appreciate the opportunity to testify on behalf of the Treasury Department regarding H.R. 2870, the proposed Tropical Forest Conservation Act of 1998. This legislation would help protect tropical forests in developing countries through a combination of U.S. debt reduction and debtor government creation of local funds to preserve, maintain, and restore tropical forests.

The fundamental objectives underlying this legislation are clearly laudable. The Treasury Department supports both efforts to preserve tropical forests and the concept of linking debt reduction to environmental objectives. The original Enterprise for the Americas Initiative (EAI), and our current buyback/swap program encompass such linkage.

H.R. 2870 closely follows that of the EAI, through which the United States provided $875 million in debt reduction to seven Latin American and Caribbean countries. This program generated $154 million in local currency funds for the environment and child survival, with over 700 grass roots projects funded to date -- ranging from reforestation projects and the rehabilitation of critical watersheds to environmental projects for homeless children. Decisions on how these funds will be used will continue to be made by combination public/private boards within the debtor countries, and to be monitored by a similar public/private board here in Washington.

One of the U.S. environmental NGOs has called the EAI the best kept secret in Washington. We're glad its good work in this Hemisphere is being recognized. Local funds created through debt reduction in 1991-1993 will continue to generate funds for the environment and child development for many more years.

Recently, in an effort to continue the EAI program, the Administration proposed, and Congress approved, a buyback/swap program for the region. Under this program, USAID debt is sold at its government asset value, based on its expected net present value. The sale can occur either to the debtor country (through a buyback) or to a third party (through a swap). No U.S. budget cost is incurred through these transactions. The debtor country receives a debt reduction benefit, and in turn provides local currency resources to support environmental, child survival, development, or investment programs.

We have received expressions of interest in this program from Jamaica, the Dominican Republic, and Guatemala, and have just completed a debt buyback by Peru. Peru's transaction permitted it to repurchase USAID debt for one-third of its face value, while generating $23 million for local environment and child survival programs. We believe authority for buybacks or swaps would be a useful addition to H.R. 2870 that could significantly reduce its budget cost.

The Administration's FY 1999 budget request for debt restructuring programs focuses primarily on international efforts to assist the poorest countries. This includes up to 67 percent debt reduction under the current Naples Terms within the Paris Club of creditor governments. For those countries requiring additional relief, the Paris Club will provide up to 80 percent debt reduction in combination with debt relief from multilateral creditors under the heavily indebted poorest countries debt initiative, known as HIPC. In addition, the Administration is seeking appropriations to support full forgiveness of concessional debt for poorest African countries which qualify with strong reform efforts under the President's Africa Initiative.

In considering H.R. 2870, the Administration will want to review how this legislation might complement existing debt reduction programs. We are also concerned that support for this legislation not take resources from existing debt and environmental programs, which we believe are a priority.

The Global Environment Facility

In particular, the Administration is seeking $300 million in FY 1999 appropriations for the Global Environment Facility, known as the GEF. This includes $192.5 million to clear GEF arrears and $107.5 million for a first contribution to a new replenishment. The pilot phase of the GEF and negotiations for the first independent GEF occurred during the Bush Administration. It has continued to receive strong bipartisan support during the Clinton Administration.

The GEF is the foremost international organization helping developing and Eastern European countries conserve the world's remaining forests and their biological diversity. The GEF also assists in addressing degradation of international waters and fisheries; pollution from inefficient energy use; and destruction of the ozone layer. In the forestry sector, the GEF works for the kind of policy reforms and law enforcement that allow programs like the EAI to have sustained positive impacts. The GEF is implementing major forest projects in over 40 countries and supporting better forest management capacity in many more.

The GEF is our top environmental priority and our top arrears clearance priority among the multilateral banks for FY 1999 funding. Its arrears are the highest of any of the international financial institutions. We believe it is crucial to clear all Global Environment Facility arrears and to authorize and contribute to the second GEF replenishment this year. We therefore encourage strong Congressional support for our funding request for the GEF for FY 1999 as a key element of U.S. international environmental programs.

Possible Modifications to H.R. 2870

We believe the proposed Tropical Forest Conservation Act of 1998 could attractively complement our current programs in future years. We want to work with the Committee as this legislation moves forward to consider a number of issues, including whether to continue to focus action on concessional debt, as we have in the past, or to also include action on other debt, as suggested in this legislation. The Administration could conceivably use this legislation to complement action under existing programs for poorest countries and as a new benefit for lower middle income countries with heavy debt burdens in all regions of the world. However, we believe the Administration should have the flexibility to adjust the degree of debt reduction and to utilize debt buybacks or swaps where appropriate for more creditworthy countries.

Finally, some of the proposed eligible countries for FY 1999 and 2000 are already receiving benefits under existing debt reduction programs, or have little remaining U.S. debt. A broader scope for action would permit the Administration to take into account both the relative need for debt reduction and the potential for tropical forest benefit in individual countries in designing a final program for implementation.

I would like to thank the Committee for the opportunity to comment on the proposed Tropical Forest Conservation Act of 1998. We look forward to working with you as this legislation moves forward.